Mumbai, Feb. 23: Fears of inflation casting a shadow on the budget caused a crash in stocks with the sensex losing 389 points to end at a one-month low of 13632.53.

There was an all-round correction on aggressive selling and no fresh purchases, and the fall in the sensex was the highest for 2007.

Investors are scared of inflation, which fell to 6.6 per cent today but remained well above the RBI’s permissible band of 5-5.5 per cent.

Brokers feel there will be little to cheer for companies in the budget. Relaxations in tax rates are unlikely, while to check inflation, finance minister P. Chidambaram may cut customs duties which will hurt industry.

Apart from inflation, there were other reasons for the drastic correction. According to Dhiraj Sachdev, vice-president & fund manager-portfolio management services, HSBC Asset Management, investors are only unloading the huge outstanding positions in futures and options.

He said the high levels of the sensex precipitate a steep fall in its value even when the corrections are just 2 per cent to 3 per cent.

“Most of the positions built on the F& front are leveraged and when there is a correction, the intensity of selling only increases,” he adds.

On the other hand, D.D. Sharma, senior vice-president at Anand Rathi, said that in a rising interest rate regime, investor interest gets diverted from equities to bank deposits and debt.

He said that while signs of a major correction have been visible for the last one month, the stock markets have now breached an important support level.

“The nifty could shrink another 200 points in the coming days,” he adds.

After opening firm at 14071.27, the sensex fell sharply to a low of 13568.08 before ending the day at 13632.53, a net loss of 388.78 points or 2.77 per cent, from the previous close of 14021.31.

The extent of the fall is reflected in 29 of the 30 sensex scrips ending in the red. The market breadth was also sharply negative as 2,209 stocks recorded losses while only 405 closed with gains.

The S&P CNX Nifty of the National Stock Exchange (NSE) tumbled by 101.05 points, or 2.5 per cent, to end at 3938.95.

The trading volume improved further to Rs 4,563.10 crore from Rs 4,243.02 crore yesterday. Power Finance Corp, which listed today, clocked the highest turnover of Rs 450.79 crore.

Markets turned weak after president A.P.J. Abdul Kalam said in the parliament that the government will take all steps to keep inflation under check.

With inflation running high, bank shares bore the brunt of selling pressure on concerns over the Reserve Bank of India further tightening the interest rates.

While SBI plummeted by Rs 21.70 to Rs 1,058.40, HDFC Bank came down by Rs 31.10 to Rs 957.45 and ICICI Bank by Rs 40.55 to Rs 907.95.

The other prominent shares that lost ground included ITC, Bharti Airtel, Grasim Industries and Infosys Technologies.